The lowest interest rates and the most favorable terms are reserved for owner-occupied homes. As the phrase implies, the owner of the home or property lives in the place as their main residence.
When analyzing risks for lending money, lending companies feel that the owner of the place is more likely to work hard and make the payments compared to a tenant or even in the case of a vacation home.
However, this is an obstacle for people that wish to purchase a home for their aging parents or physically challenged child. For such situations, Fannie Mae has the Family Opportunity Mortgage.
Aging Population Creates Bigger Need
According to Statsta.com, 328.2 million people are living in the USA as of 2019. Of that number, over 28% of the people are aged 65 and above.
That means that we have over 92 million in the country who are beyond the age of retirement. Many of these people will need some type of living assistance as their age increases.
For this reason, many households are looking at various options. Some people use nursing homes and other medical facilities to care for their loved ones, but this can be a very expensive option and is not always the best option.
Others rearrange their home and their schedules to allow the aging relative to move in with them. But this removes some of the independence for the elderly relative and can be stressful for everyone involved.
For these reasons and many more, the Family Opportunity Mortgage was created. It is a unique loan aimed at helping the above situations and allows people to remain in a home of their own without breaking the bank.
Family Opportunity Mortgage Basics
Many Americans are faced with trying to keep their parents or adult children in a safe living environment. Some turn to rent a property that is nearby and cheap, but most people would prefer to own rather than rent. The problem, as mentioned above, comes in the structure of the loan.
When people take out a loan to buy a 2nd home, the down payment requirement is quite large.
Most lenders will ask for at least a 10% down payment, and possibly 20%. Furthermore, the interest rate for a 2nd home will be noticeably higher, especially on a long fixed-term loan.
Also, the premiums for homeowner’s insurance are higher if the property is a 2nd home or a rental property.
The Family Opportunity Mortgage (aka FOM) program is a conventional program offered by Fannie Mae that allows the buyer to pay only a 5% down payment. For a home priced at $200,000, this can save the buyer $10,000 at the time of purchase in upfront costs.
Lower Down Payments and Rates Save Borrowers Money
The first significant savings for borrowers comes in the form of a down payment.
While a loan for a 2nd home or an investment property would normally require between 10% and 20% down payment, this program only asks for a 5% down payment.
On a home priced at $225,000, the difference between a 20% down payment and a 5% down payment is $33,750. For most folks, the program is the difference between renting a place for a loved one vs buying a place for a loved one.
When you combine the low down payment of the loan with the excellent low-interest rates offered by Fannie Mae for conventional loans, it is clear to see that this type of financing can save the borrower a lot of money over the life of the loan.
Debt-to-Income Ratios can be Higher
Besides the low-down-payment feature, the debt-to-income ratios available with this program are another big selling point of the loan.
The lending rules for most other loans such as FHA, the VA, or any conventional loan prefer that the borrower’s debt to income ratio is somewhere around 40% to 43%.
What does that mean, in real terms?
It means that the borrower’s loan payment, plus all other existing debt like car payments, credit card bills, student loans, and other unsecured loans cannot represent more than 43% of the monthly gross income.
So, for a borrower that makes a $60,000 annual salary, their average monthly income, before taxes are taken out, is $5,000.
43% of $5,000 is $2,150. For this borrower, on a conventional loan or most other types of home loans, the most that they could spend in monthly debt would be $2,150
However, the FOM allows borrowers to have as much as 50% of their gross monthly income dedicated to debt.
For the same $60,000 borrower, this means that they could have as much as $2,500 in monthly debt payments.
Fannie Mae understands that many households will be making a sacrifice to help purchase a home for an elderly parent or their adult child with special needs. All of this is taken into consideration with the higher ratios allowed on the loan.
Using Multiple Sources of Income
Another obstacle to getting approved for a loan to buy a 2nd property is proof of income. When people are considering buying a 2nd home, they will typically be allowed to use a portion of the monthly rental as income to qualify for the home. However, if you are buying a home for a loved one and plan to make the loan payments, it is highly unlikely that you will be receiving rental income.
This is why Fannie Mae will allow both the borrower and their relative to use their combined income to qualify for the loan.
This is very handy if you have an elderly parent that is receiving retirement income or investment income and you need that revenue source to qualify for the loan.
This is also true if you have an adult child with special needs that works a part-time job or receives income from other sources.
Qualifying for the FOM
Qualifying for the loan is very similar to qualifying for a conventional loan through Fannie Mae.
This means that the borrower will need a better than average credit score compared to some other home loan options.
It also means the borrower will need to have a very reliable source of income for at least the last 2 years. However, the main borrower does not have to live at the home as their main residence.
The borrower will need to provide documents for their income as well as assets just like with any other loan. Pay stubs, annual W-2 statements, tax returns, investment & retirement account statements will all need to be provided to the lender.
If the elder parents are signing on the loan, they too will need to provide proof of income. For people living on social security, a Social Security letter showing their monthly income will need to be obtained.
If a person or married couple wishes to buy a home for their aging parent, the borrower will be considered the occupant for the sake of the loan. If the aging parents do not have enough income to qualify for the loan, they are not required to sign on the loan at all.
No Distance Restriction
Fannie Mae has a rule in place stating that a borrower who wishes to buy a 2nd home must have at least 100 miles between their main residence home and the 2nd home. However, this rule is WAIVED for this loan. This allows people to buy a property for their elderly parents that are relatively close by, making it more convenient to visit and care for their relatives.
Some people have purchased a 2nd home in their neighborhood just to keep their relatives close by.
Fannie Mae does have some restrictions about the type of homes that can be purchased with the FOM.
- The property may not be a timeshare or any type of investment home
- Single unit dwellings are the only homes allowed
- The intended borrower must be the main person in control of the home
- The home needs to be suitable for living year-round
- The owner of the property may not agree to allow a management firm to take over the control or occupancy of the home
In essence, Fannie Mae is stating that the person(s) buying the home needs to own the property and that this is not an attempt to fool Fannie Mae into an investment or vacation property deal.
Qualifications for Elderly Parents
These are the basic requirements for adults wishing to purchase a home for their elderly parents.
- The elderly parents must either be in a situation where their income is not sufficient to be approved for a loan or they cannot work.
- The elderly parents must live in the home as their primary residence.
- There is no requirement of the distance between the home of the elderly parent(s) and the home of the adult child.
- The elderly parents are allowed to be co-borrower on the loan, but it is not necessary. The adult child will be the primary focus of the application.
- The adult child may own a primary residence in addition to applying for the home of their elderly parent.
Could be Cheaper Than Assisted Living
Some households are faced with the possibility of paying for assisted living out of pocket. This can be truly expensive and even inconvenient for many people. With the FOM, it might be possible to purchase a home and still afford part-time health care for elderly parents for less than the price of a nursing home.
Each situation is different, and your family will need to weigh the pros and cons of owning a second home versus using an assisted living facility to determine what is best for them.
Qualifications for Disabled Children
The FOM is also ideal for parents that wish to provide a home for their disabled, adult children. Many people that face life with disabilities hold jobs and contribute to society in meaningful ways. However, their level of income is typically low and does not afford them the chance to buy a home.
Just like the situation mentioned above for elderly parents, the same rules apply for people that wish to buy a home for their grown, disabled child. The parents will be considered the primary borrower and owner of the property even though their child will be the main resident. This allows the disabled child to exert a form of independence and gives the parents peace of mind knowing that their child is living in a safe place nearby.
The main requirement for this loan is that parents must present documented evidence of their child’s disability. This will usually be a statement from the child’s primary physician explaining the physical condition and the limited options for gainful employment.
Also, this type of loan is intended only for the child of the borrowers. This loan cannot be used on any type of investment or vacation home. The loan will also only be used as either a purchase transaction or a rate/term refinance. A cash-out refinance is not allowed.
You Can Later Convert the Property to a Rental Home
If the situation changes in the future and your relative no longer needs the home, you do not have to sell the property. You can contact your lender and with just a few steps, convert the home to a rental property.
The loan payments and term will remain the same, except you will now have a tenant living in the home that pays you monthly rent.
This could be a great way to add an income-producing asset to your portfolio without going through the necessary hurdles that come with buying a rental property.
Summing Up the FOM Program
This loan program offers a way for both elderly people and those individuals fighting against a handicap to have a sense of independence while still being close to their loved ones for support.
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